Many financial analysts currently expect the value of the US dollar to continue falling. The gradual reduction of its value began at the onset of the Covid-19 pandemic in the US last March. This slide took place after an initial increase.
Current statistics confirm the alarming trend surrounding the dollar. During the pandemic, the dollar’s value declined by 10% to 12% in comparison to the values of the US’ main trading partners’ currencies. This fact also meant that the dollar recently reached its lowest total value since early 2018.
Some experts consider three separate reasons as the primary catalysts for further falls in the value of the US dollar. These reasons include an increase in the value of the euro, a widening in the US’ current account deficit, and the US Federal Reserve’s lack of response to the dollar’s current weakness.
The current account deficit widened in both the second and third quarters of 2020. During the second quarter, the deficit increased by 1.2 percentage points. This caused it to reach a figure of 3.3% of the total gross domestic product (GDP) of the US. It then widened again to 3.4% of the country’s total GDP in the third quarter of the year.
The increase seen in the second quarter broke the previous record for the largest widening registered to date. As a result, the current deficit widened to an extent not seen since the end of 2008. The reduction in domestic saving serves as the primary factor causing this deficit. This reduction stems from steep federal budget deficit increases; the increases in question relate to the Covid-19 pandemic.
The value of the euro remains similar to its value in June of last year. However, this recent stability came directly after a steep value increase. Between February and May 2020, the value of the euro increased by around 7%.
The possibility of the euro’s further value increase also exists. Such an increase may result from an agreement between German Chancellor Angela Merkel and French President Emmanuel Macron. This agreement concerns the Next Generation EU fund, a relief package worth €750 billion (RM3.69 trillion). The fund will last until 2023 and support European Union nations in their efforts to recover from the Covid-19 pandemic.
The Federal Reserve adopted an “average inflation” targeting regime in August. Defying expectations, the Federal Reserve thus decided against tightening US monetary policies. This meant that the Federal Reserve would delay its response to combat any increase in inflation rates across the country.
The Federal Reserve’s quantitative easing measures will likely cause an overhang of excess liquidity. This will in turn lead to a further weakening of the dollar. The drop in the dollar’s value will probably intensify, given the US’ increased dependence on foreign capital. This dependence stems from the country’s desire to compensate for its increasing shortfall of domestic savings.
by Weijun
27th January 2021 12:49
